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KEY
FINDINGS

Plans
that rely largely on benefit cuts to restore solvency to Social Security
are adverse for Hispanics, compared to plans that employ a balanced mix of
benefit reductions and progressive revenue changes.

Hispanics
are likely to do worse under reform plans that make young workers and
future generations bear the brunt of the sacrifices needed to preserve
Social Security.

The
Presidents Social Security plan fails on both of these counts. It relies
entirely on backloaded benefit cuts that would hit young workers and
future generations hard.

Replacing
Social Security with private accounts would be especially harmful to
Hispanics. Hispanics benefit disproportionately from Social Securitys
social insurance aspects and redistributive nature, which would be
eliminated in a pure private account system.

Hispanics
should be encouraged to save more for retirement by revamping and
improving the current system of tax preferred saving accounts.

The Hispanic community has a
great deal at stake in the debate over Social Security. In a separate
report, we have analyzed the particular importance of the Social Security
system to the Hispanic community.[2]
Hispanics receive a higher rate of return on the taxes they pay into the
system than the rest of the population, and elderly Hispanics rely on Social
Security for a larger share of their income than other elderly Americans
do. For Hispanics, Social Security reform plans must be evaluated in light
of the significant benefits they receive from the current system.

In this analysis, we outline
the potential effects of Social Security reform on Hispanic Americans. We
consider how the Administrations proposals to change Social Security
benefits would affect the Hispanic community. We also discuss alternative
types of reforms.

In summary:

Plans to restore Social Security solvency that rely largely on
reductions in Social Security benefits would tend to be more harmful to
Hispanics than plans that employ a balanced mix of benefit reductions and
progressive revenue changes, since Hispanics disproportionately gain from
Social Security benefits. Simply stated, Hispanics would tend to be
harmed disproportionately if large cuts are made in a system from which
they disproportionately benefit.

The Hispanic population today is overwhelmingly young, but it is
expected to age rapidly over the coming decades. Reforms that

shield
current retirees and spare baby boomers much pain, while making later
generations of retirees bear the heaviest load, would be especially
detrimental to Hispanics.

To be sure, all generations 
both old and young  benefit from Social Security, as it serves and is
expected to continuing serving as a basic form of income security for the
survivors of deceased workers, people with disabilities, and retirees.
But, the system faces a fiscal shortfall that needs to be addressed. For
Hispanics, it is particularly important that this shortfall not be closed by
measures that largely spare the baby boomers and place the burden of reform
almost entirely on younger generations.

The Presidents Social Security proposals fare poorly on both
of these counts. The plan that the President has proposed relies entirely
on benefit cuts to reduce the Social Security shortfall. Furthermore, the
Presidents plan largely exempts the baby-boom generation from significant
benefit reductions and makes later generations bear much steeper cuts as a
result. Such backloaded cuts would fall especially heavily on Hispanics.

Closing the Social Security
shortfall is particularly important to the Hispanic community. As a young
population that is rapidly aging and receives more in return for its
contributions to Social Security than others, Hispanics have much invested
in the future solvency of the system. The Presidents plan, however, would
restore solvency in a way that is more detrimental to Hispanics than various
other reforms would be.

There has been a campaign to sell the Hispanic community on
the notion that Hispanics would fare better if Social Security were replaced
by private accounts. Careful analysis shows that the opposite is true.
Hispanics benefit disproportionately from the various types of insurance
that Social Security provides and from Social Securitys redistributive
nature. Pure private account plans would eliminate this redistribution, as
they would tie each workers benefits directly to that workers
contributions to his or her private account. This would be harmful to the
Hispanic community.

Hispanics, in general, tend to be ill-prepared for retirement
in terms how much they have accumulated in pensions and other retirement
savings. The solution is not to begin to dismantle the Social Security
system, which is the one form of retirement security that works particularly
well for Hispanics. Instead, the current system of tax-preferred saving
accounts, such as 401(k)s and IRAs, should be revamped and improved. In
their current form, these accounts and the tax breaks that support them
provide their greatest benefits to people with the highest incomes. To
better secure Hispanics retirement, the current system of tax incentives
for saving should be reformed to provide greater incentives and
opportunities for saving by middle- and low-income American workers and
their families. The National Council of La Raza has also recently suggested
a number of relatively modest adjustments to the Social Security system that
would benefit the Hispanic community and should be considered as part of
reform.[3]

The Threat of Large Benefit Cuts and
Imbalanced Reform

A number of plans under
discussion would restore Social Security solvency primarily or exclusively
through benefit reductions. Over time, some of these plans would sharply
reduce the portion of a workers pre-retirement income that Social Security
replaces and would reduce Social Security survivor benefits and possibly
disability benefits, as well. This would have adverse effects on Hispanics.

* Note: The earnings levels in the
table are given in todays terms. Over time, workers earnings
are assumed to grow at the same rate as average wages.

Source: Authors calculations based on
Social Security Administration, Office of the Chief Actuary,
Estimated Financial Effects of a Comprehensive Social Security
Reform Proposal Including Progressive Price Indexing --
INFORMATION, February 10, 2005 and Social Security Trustees,
2004 Annual Report. All percentage reductions in benefits are
taken directly from the actuaries memo.

As noted, Hispanics receive a
higher rate of return on the taxes they pay into the system than the rest of
the population, and elderly Hispanics rely on Social Security for a larger
share of their income than do other elderly Americans. Thus, to the extent
that a plan substantially reduces Social Securitys role in providing
retirement security and redistributing resources, the Hispanic community
would tend to be harmed. Hispanics would be harmed disproportionately if
large cuts are made in a system from which they disproportionately benefit.

The Presidents Social
Security proposals, as they have been outlined so far, rely solely on
benefit cuts to restore solvency to the Social Security system. The
President has proposed sliding scale benefit reductions (also known as
progressive price indexing) that would result in growing and, eventually,
sharp benefit cuts for many Social Security beneficiaries.

All workers who earn more than about $20,000 today would be subject to
benefit reductions. About seven of every ten workers would be
affected.

The benefit reductions for middle-class workers would be
large. The benefit cuts would escalate sharply in size as income rose above
$20,000, until income reached $90,000. (The benefit reductions would be the
same for people making $90,000 as for people making larger amounts.) A
worker who earns about $37,000 today (the current average wage) would be
subject to benefit reductions more than half as large, as a percentage of
the workers scheduled Social Security benefits, as the benefit cuts imposed
on people at very high income levels. And a worker who makes about $59,000
today would be subject to benefit reductions nearly as large, as a
percentage of scheduled benefits, as the reductions imposed on someone
making millions of dollars a year. The Social Security benefits of a
$59,000-a-year worker who retires in 2045 would be reduced by 25 percent, or
about $6,400 a year.

Since
middle-income Americans rely on Social Security to replace a much larger
share of their pre-retirement income than wealthy individuals do, the pain
of these benefit cuts would be much sharper for the middle class than for
high-income individuals. As Table 2 shows, the proposed benefit cuts would
be much larger, as a share of average pre-retirement income, for
middle-income Americans than for those at high income levels. For example,
in 2045, someone making $1 million a year in todays terms would face an
annual Social Security benefit cut equal to 0.6 percent of his or her
pre-retirement income. In contrast, a worker making about $59,000 in
todays terms would face a benefit cut equal to 7.4 percent of his or her
pre-retirement income. The Administrations proposed cuts would thus impose
a greater burden on middle-income workers than on very high-income workers,
relative to their incomes.

* Note: The earnings levels in the
table are given in todays terms. Over time, workers earnings
are assumed to grow at the same rate as average wages.

Source: Authors calculations.

To its credit, the Presidents proposal would exempt many of
the poorest workers from these benefit cuts, although contrary to White
House claims, some poor beneficiaries would indeed be subject to cuts (see
footnote).[4]
The Presidents proposal also includes an enhancement for low-income
workers, which represents a positive step. Nonetheless, middle-income
Hispanic workers would face sharp benefit reductions in retirement, and
Hispanics as a whole would fare worse under the Presidents proposal than
under plans that combine much more modest benefit cuts with progressive
revenue enhancements.

Moreover, the Administration
may eventually endorse deeper benefit cuts. The benefit cuts that the
Administration has proposed to date would close only about 59 percent of the
75-year Social Security shortfall, as measured by the Social Security
Trustees.
[5] Further adjustments on
top of the Presidents proposed benefit reductions would be needed to close
the shortfall.

When asking his Social
Security Commission to outline options for reform in 2001, the President
directed the Commission to avoid any measures that would raise additional
revenues. Since then, the President has softened his stance somewhat and
has not ruled out legislation that would raise the maximum level of income
that is subject to the Social Security payroll tax (currently set at
$90,000). But so far, the Administration has proposed only benefit cuts,
and it seems clear that the Administration will support only measures to
restore Social Security solvency that rely largely or entirely on benefit
reductions.

Hispanics generally would fare better under plans that impose smaller
benefit cuts on middle-income workers than the President has proposed, by
making those with very high incomes shoulder a larger share of the load.
This could be done through progressive revenue changes, such as the
following:

Instead of repealing the estate tax (as Congress is currently
considering doing, and as the President has proposed), the estate tax could
be scaled back and reformed, with the revenues it continues to collect
dedicated to the Social Security Trust Fund. According to the Social
Security Administrations Chief Actuary, a reformed estate tax that exempts
from that tax any estate that is worth less than $7 million per couple and
$3.5 million per individual would close about 30 percent of the 75-year
Social Security shortfall.[6]
The Brookings Institution-Urban Institute Tax Policy Center estimates that,
as of 2011, such an estate tax would apply to only the three wealthiest of every 1,000 people who die;
the other 997 of every 1,000 people who die would be exempt entirely from
the tax. The fraction of Hispanics who would be subject by the tax would be
even more miniscule, given Hispanics relatively lower-wealth levels.

In addition, many have suggested raising the maximum level of
wages and salaries that is subject to the Social Security payroll tax,
which, as noted, is now set at $90,000. Still another option, proposed by
economists Peter Diamond and Peter Orszag, would be to impose a modest
surcharge on earnings above the taxable maximum, with the resulting revenues
devoted to the Social Security Trust Fund. Diamond and Orszag propose a
three to four percent levy on earnings above the maximum amount that is
subject to the full payroll tax.

Taxing
income above the current $90,000 maximum would raise substantial revenues
but affect only a small slice of workers and an even smaller fraction of
Hispanics. Only a tiny share of the Hispanic population has earnings above
the current $90,000 Social Security taxable maximum. About six percent of all workers with wage and salary income have earnings above the
current $90,000 maximum. But only about two percent of Hispanic
workers with wage and salary income have earnings above this level.[7]

The
Presidents proposals do not include any progressive revenue adjustments
that would enable the Social Security benefit reductions imposed on
middle-income workers to be more modest. The Administrations proposals
instead rely entirely on benefit cuts and place much of the burden of
restoring Social Security solvency on middle-income people. Hispanics would
not be well served by such an approach.

Future Generations Could Bear the Heaviest
Load

The Hispanic population today
is overwhelmingly young, but it is expected to age rapidly over the coming
decades.

Only five percent of the 42 million U.S. residents of Hispanic
origin are aged 65 or older today. (This compares to 12 percent of the
total U.S. population that is 65 or older.)

The Census Bureau projects this proportion will triple by
2050, with the share of the Hispanic population that is aged 65 or older
rising to 15 percent by that year.

Similarly, Hispanics are expected to compose a far larger
share of the elderly population in future years than they do today.
Currently, six percent of the population aged 65 or older is Hispanic. The
Census Bureau projects that by 2050, however, Hispanics will make up 18
percent of the elderly population.[8]

Due to these demographics,
Social Security changes that shield current retirees and spare baby-boomers
much pain while making later retirees bear the heaviest loads would be
especially detrimental to Hispanics. To be sure, all generations  both old
and young  benefit from Social Security, as it serves and is expected to
continuing serving as a basic form of income security for the survivors of
deceased workers, people with disabilities, and retirees. But, the system
faces a fiscal shortfall that needs to be closed. For Hispanics, it is
particularly important that the shortfall not be closed by measures that
largely spare baby boomers and place the burden almost entirely on younger
workers. Hispanics would fare better under approaches that more equitably
spread the burden of reform across generations. The Administrations Social
Security plan fails to do this.

Under
the Administrations proposals, Social Security benefit reductions would be
modest for those retiring in the next couple of decades, but would grow
steadily deeper over time, with each new group of retirees facing sharper
benefit cuts. As a result, todays younger workers, including many
Hispanics, would face dramatically larger benefit reductions than earlier
retirees.

Specifically, the Presidents
plan exempts those aged 55 or older from any cuts in Social Security
benefits. For those retiring in or after 2012, the first year in which new
retirees would begin to be subject to benefit reductions, the proposed cuts
would start small but mount over time. As Figure 2 illustrates, an average
wage-earner would face a benefit cut each year of:

Less than one percent if the worker retired in 2015;

11.5 percent if he or she retired in 2035;

21 percent if the worker retired in 2055; and

28 percent if the worker retired in 2075.

The
generational imbalance in the Presidents plan is further exacerbated by the
financing of the private accounts that the President has proposed. To
finance the transition to these accounts, the federal government would
borrow trillions of dollars. That would greatly magnify the debt burden on
younger generations.

Because of the borrowing
undertaken to finance the private accounts, the Presidents Social Security
proposals would add $4.9 trillion (in current dollars) to the national debt
over the plans first 20 years, with several trillion dollars in additional
debt added in the decades after that. Under the Presidents plan, this debt
would eventually be paid off through additional reductions in the
Social Security benefits of young workers. In the words of economist
Lawrence Kotlikoff, who himself favors private accounts, the
dirty little secret underlying most Social Security privatization schemes is
that they head precisely down this road of dumping the entire bill in our
kids laps.[9]
Doing that would not be in the interests of the Hispanic community.

The Danger of
Private Accounts

As we have
detailed in a separate analysis, the Social Security system
disproportionately benefits people with:

Hispanics thus would be harmed by plans, such as many private account plans,
that would shrink the social insurance aspects of Social Security by linking
each persons benefits to a much greater degree to that individuals payroll
tax payments, without regard to whether the person was paid low wages
throughout his or her career, how long the person remains alive (and thus
for how many years he or she needs income in retirement), or the misfortunes
that may befall a person, such as disability or premature death. In their
most extreme form, private account plans would eliminate these
redistributive aspects of Social Security, since the level of income that
people could draw from the accounts would be determined solely by the size
of a persons contributions to his or her account and the rate of return on
the accounts investments (rather than also being determined in part by
circumstances such as whether the person had low earnings or whether his or
her spouse or parent had died). Scaling back Social Security benefits to
pay for private accounts consequently could affect Hispanics adversely,
since they benefit disproportionately from the social insurance and
redistributive features of the current Social Security system and receive a
higher rate of return than the rest of the population on the contributions
they make to the system.

Despite
this, some reports have claimed that Hispanics would be better off if Social
Security were entirely replaced by private accounts. For instance, a widely
publicized 1998 Heritage Foundation report asserted that the Social
Security systems rate of return for most Hispanic Americans will be vastly
inferior to what they could expect from placing their payroll taxes in even
the most conservative private investments.[12] In a separate analysis, we have explained the severe shortcomings
with the Heritage report (which has been sharply criticized by the Social
Security actuaries and widely discredited) and other reports making such
claims.

In
summary, reports that claim the rate of return on private accounts would be
significantly higher than the rate of return under Social Security suffer
from two critical flaws.[13]

They generally fail to account for the substantial transition
costs of switching to a private account system. This stacks the deck in
favor of private accounts by comparing rates of return under a Social
Security system with one level of financing to rates of return under
a private-account system with substantial additional financing, without
taking the cost of the additional financing into account.

They ignore the cost of the added risk associated with
shifting funds from the traditional Social Security system  which invests
solely in U.S. Treasury bonds, generally regarded as the worlds most secure
investment  to the stock market, which is riskier and more volatile. The
nonpartisan Congressional Budget Office and a wide range of economists agree
that the cost of the added risk involved in investing in stocks (after all,
some people lose money in the stock market) should be incorporated
into any analysis that compares returns under Social Security to returns
under private accounts.

The
bottom line is that once transition costs and stock-market risk are taken
into account, a system with private accounts would not produce a
better rate of return for the population as a whole than the Social Security
system. And for Hispanics, the Social Security system is distinctly
preferable to private accounts since Hispanics benefit disproportionately
from Social Securitys social insurance aspects and redistributive nature.

Strengthening
Retirement Security for Hispanics

Hispanics in general tend to be ill-prepared for retirement
in terms how much they have accumulated in pensions and other retirement
savings. The solution to this problem is not to contract or dismantle the
Social Security system, the one form of retirement security that works
especially well for Hispanics. Rather, the solution is to revamp and
improve the system of tax-preferred saving accounts, such as IRAs and
401(k)s. In their current form, those accounts provide the most powerful
incentives and most generous tax benefits to people who have the highest
incomes (and the least need for incentives and subsidies to help them save
adequately for retirement). To better secure Hispanics retirement, the
current system of tax incentives for retirement saving should be reformed to
provide greater incentives and opportunities for middle- and low-income
Americans to save.

Hispanic workers have far lower participation rates in
employer-sponsored retirement plans than either whites or blacks. A recent
study by the Employee Benefits Research Institute found that of the 16.3
million Hispanic wage and salary workers aged 21-64 in 2003, only 29
percent participated in an employer-sponsored retirement plan. This
compares to a participation rate of 53 percent among white wage and
salary workers in the same age range and 45 percent among black wage
and salary workers.[14]

The Social Security Administration reports that, as of 2002,
only 26 percent of elderly Hispanics aged 65 and over had income from
assets. By contrast, 55 percent of the elderly population as a whole
received income from assets. Similarly, only 13 percent of the Hispanic
elderly population received income from private pensions or annuities while
29 percent of the elderly population as a whole did.[15]

Hispanics consequently tend to rely on Social Security for a
larger share of their retirement income. In 2002, some 41 percent of
elderly Hispanic Social Security beneficiaries relied on Social Security for all of their income, compared to 22 percent for Social Security
beneficiaries as a whole.
[16]

The
current system of tax-preferred saving accounts is particularly ill-suited
to helping Hispanic workers provide for their retirement. To encourage
participation in retirement saving plans, the current system relies
principally on tax deductions and exclusions which shield from taxation the
money that people save in various types of retirement saving vehicles. The
value of such deductions and exclusions depends on an individuals tax
bracket. The higher the tax bracket, the greater the value of the deduction
or exclusion; the lower the tax bracket, the smaller the value of the
deduction or exclusion and thus the smaller the size of the tax subsidy. In
addition, the current system of saving incentives can be quite complicated.
For a population like Hispanics with lower-than-average income and education
levels, this incentive system tends to be rather ineffective.

Brookings Institution economist Peter Orszag has proposed a number of policy
changes that would improve retirement security for low- and middle-income
families by simplifying the current system and strengthening the
incentives. Such reforms would be especially beneficial for Hispanics.
These reforms include:[17]

Automating 401(k)-type retirement plan so employees are
automatically enrolled in these plans. (To refrain from participating,
employees would have to opt out, as opposed to the current system in which
employees must specifically opt in.) When one large U.S. corporation
instituted automatic enrollment in its retirement plan, participation rates
increased dramatically among its new employees, especially Hispanic
employees. The participation rate for new Hispanic employees quadrupled,
jumping from 19 percent to 75 percent.[18]
This follows the trend seen among the employees of other corporations that
have instituted automatic enrollment, where participation rates have also
risen dramatically.[19]

Revamping and expanding the current savers credit. This
credit, enacted in 2001, provides a tax subsidy to encourage moderate-income
families to make contributions to retirement accounts. The tax credit
essentially provides a government matching contribution for the
contributions that moderate-income workers make to IRAs, 401(k)s or similar
accounts. To be more effective, this tax credit should be made
refundable (as the Earned Income Tax Credit is) so that the credit also
can benefit low-income workers who do not earn enough to owe federal income
tax. In addition, the savers credit could be made more transparent so
people can more readily see that the government will match the contributions
they make.

Reducing the disincentives to save for
retirement produced by the asset tests applied in means-tested programs such
as Food Stamps, Medicaid, and the Supplemental Security Income program.
Although the rules vary from program to program and from state to state, the
rules often require that retirement accounts such as 401(k)s and IRAs be
counted toward the asset limits in these programs. This means
low-income families can lose eligibility for the programs if they began to
build even modest retirement savings. Exempting retirement accounts
from the asset tests used in these programs would remove a significant
barrier to saving among low-income working families.

Allowing workers to deposit part of their tax refund directly
into a retirement account while preserving the rest of the tax refund for
other purposes. Currently, taxpayers may direct the IRS to deposit their
entire refund amount into only one account. Taxpayers may not ask
the IRS to split their tax refund, with part (but not all) of it going to a
retirement account. Peter Orszag has noted that, This all-or-nothing
approach discourages many households from saving any of their refund. Some
of the refund is often needed for immediate expenses....[20]
Allowing taxpayers to split their refunds would give them greater
flexibility to direct a portion of the refunds into retirement accounts.

National
Council of La Razas Proposals to Expand Coverage and
Enhance Benefits for Hispanics

As this analysis explains, the Social Security system provides better
returns to the Hispanic community than to the population as a whole and to
non-Hispanic whites or blacks. Nonetheless, the system could be improved
and strengthened.

In a new report, the National
Council of La Raza suggests ways in which the Social Security system could
be adjusted to widen its coverage and strengthen its support for elderly
Hispanics.[21]
NLCR notes that most Latinos who are eligible for Social Security benefits
receive an ample amount of income support over their retirement and benefit
greatly from the systems progressivity and indexed benefits. But NCLR
also finds that while those Hispanics who are eligible for Social Security
benefits are helped more than other beneficiaries, on average, a smaller
share of elderly Hispanics receive Social Security checks than of other
retirees.

According to the Social
Security Administration:

77 percent of Hispanics aged 65 or older were paid Social
Security benefits in 2002.

By contrast, 83 percent of blacks and 91 percent of whites
received Social Security checks.

Social Security coverage is
lower among elderly Hispanics for several reasons. Although undocumented
workers frequently pay taxes into the Social Security system (under false or
non-work status Social Security numbers), many of these workers, who are
disproportionately Hispanic, will never collect Social Security benefits
based on these contributions. The presence of undocumented workers lowers
Hispanic participation rates.

The Social Security system,
through its ten-year work requirement, also lowers coverage rates for
Hispanic workers who are here legally. To qualify for Social Security
retirement benefits, a worker must contribute to the Social Security system
for at least ten years (40 quarters). This creates a cliff in the system
that can adversely affect workers with short work histories. Despite the
fact that they have contributed payroll taxes, those who work for less than
ten years in covered employment receive no retirement benefits (unless there
is a totalization agreement in effect with an immigrants native country;
see footnote 22), while someone who works exactly ten years can receive
substantial benefits.

New immigrants, of which there
are many in the Hispanic community, tend to have relatively short work
histories in the United States and thus would tend to be disproportionately
harmed by the way the threshold is structured.
[22] The Social Security
earnings requirements also make it more difficult for domestic workers (many
of whom are Hispanic) than for others to get work counted toward the
ten-year threshold. Finally, a number of Hispanics work in sectors, such as
agricultural labor, where some employers underreport earnings to the Social
Security. This makes it more difficult for some Hispanics, such as
itinerant farm workers, to accrue the ten years necessary to qualify for
benefits.

To raise coverage rates among
Hispanic workers, NCLR suggests a number of adjustments to the current
system. The proposed changes include:

Reducing the amount of earnings necessary in a year for
domestic workers to get work counted toward the ten-year eligibility
threshold.

Increasing the reporting of earnings to Social Security by
applying stronger enforcement measures to those industries (such as farm and
construction work) in which underreporting is widespread.

Approving a totalization agreement with Mexico. Last year,
the United States signed a totalization agreement with Mexico that would
allow workers to apply work in both countries toward the ten-year
eligibility requirement for Social Security. (See footnote 22.) The
agreement has yet to go into effect. For this to happen, the Social
Security Administration has to complete implementation procedures for the
agreement. With this done, the President must submit the agreement to
Congress for a 60-day review, during which neither house of congress passes
a resolution of disapproval.

NCLR also has added its voice
to that of many independent groups and policymakers, including the President
and a number of members of Congress, in expressing support for strengthening
Social Securitys minimum benefit. The current system includes a minimum
benefit, but the benefit is small and rapidly phasing out. A meaningful minimum benefit in Social
Security would help lift low-income workers out of poverty in retirement.

Strengthening the
Social Security Administrations Other Program:Supplemental Security Income for the
Elderly and Disabled Poor

The Social Security Administration
also administers the Supplemental Security Income program, which
provides a basic safety net for poor seniors and people with
disabilities who either receive small Social Security benefits or do
not receive Social Security at all. The SSI program lifts poor
individuals who are elderly or disabled to about 75 percent of the
poverty line and poor couples to about 90 percent of the poverty
line. In most states, receipt of SSI also qualifies an individual or
couple for health insurance coverage through Medicaid.

As the recent report from the National
Council of La Raza notes, SSI is of particular importance to
Hispanics. Some 13 percent of Hispanics aged 65 and over receive SSI.
This percentage is much higher than those for elderly whites, three
percent of whom receive SSI benefits, and also exceeds the percentage
for elderly blacks, 10 percent of whom receive SSI.* The NCLR report
explains that SSI is particularly important as a safety net for
Latinos who work intermittently for very low wages, who didnt always
work in Social Security-covered jobs, or who immigrated to the U.S.
late in life.** Such people tend to qualify for small Social
Security benefits that leave them well below the poverty line or not
to qualify for Social Security at all.

SSI Improvements Needed to Prevent
Well-intended
Social Security Reforms from Harming Vulnerable People

There appears to be broad consensus
across the political spectrum in support of reforms that would assist
poor Social Security beneficiaries by strengthening Social Securitys
minimum benefit (discussed elsewhere in this report) and improving
what is sometimes referred to as Social Securitys widows benefit 
i.e., the benefit for surviving spouses who are age 50 or older if
disabled and age 60 or older otherwise. (Under the consensus
proposal to strengthen the widows benefit, the Social Security
benefits of a low- or moderate-income widow or widower would not fall
below 75 percent of the combined Social Security benefit that the
couple received when both spouses were alive.) Both of these reforms
would be desirable. Yet they would have a severe side-effect on some
poor elderly and disabled people who receive both Social Security and
SSI  and would make these people significantly worse off  unless the
reforms are accompanied by a key reform in SSI.

For people who receive both Social
Security and SSI, an increase in Social Security benefits triggers a
dollar-for-dollar reduction in SSI benefits. If an increase in Social
Security benefits lifts such people modestly above the SSI income
limit, they lose eligibility for SSI  and consequently could lose
Medicaid coverage in a majority of states. The resulting loss of
health care coverage and the increase in out-of-pocket health care
costs these people would have to bear would far outweigh the small
increase they would get in their monthly checks from the Social
Security Administration. With a larger share of elderly Hispanics
receiving income from a combination of Social Security and SSI than of
the rest of the elderly population, this is a matter of particular
significance for the Hispanic community.

This matter could be addressed by
including in Social Security legislation a provision requiring that
people who would be eligible for SSI in the absence of improvements in
Social Securitys minimum benefit and widows benefit be deemed to
be receiving SSI for purposes of determining their eligibility for
Medicaid. This would enable the affected people still to qualify for
Medicaid. On several occasions in the past when Congress made changes
in Social Security that would cause some people to become ineligible
for SSI, Congress has included such a provision to prevent the loss of
Medicaid coverage.

Other SSI Improvements

The SSI asset limits, set at $2,000 for
individuals and $3,000 for couples, have not been adjusted since
1989. They have been heavily eroded by inflation. These limits have
effectively been reduced by 36 percent since 1989, because of the lack
of any inflation adjustment.

These limits are eroding further and
becoming more restrictive with each passing year. An upward
correction in them, and a provision to adjust these limits for
inflation in the future, would be of significant help to Hispanics.

In a similar vein, when the SSI program
was created in 1972, Congress directed that the first $20 in Social
Security benefits, veterans benefits, or other unearned income be
disregarded in determining SSI eligibility and benefit levels. This
level has not been adjusted for inflation in the 33 years since.
Consideration should be given to increasing it, as well, and adjusting
it for inflation in the future.

Finally, the harsh limitations enacted
in the mid-1990s that severely restrict SSI eligibility for legal
immigrants should be eased. Legal immigrants who lawfully entered the
United States on or after August 22, 1996 are categorically ineligible
for SSI, unless they (or a spouse or parent) have amassed 40 quarters
of work in this country. Even a legal immigrant who has been unable
to amass 40 quarters of work because he or she has become severely
disabled after entering the United States, as a result of a workplace
or other accident or the onset of a serious disease, is barred from
SSI despite his or her obvious need. The SSI rules regarding the
eligibility of legal immigrants are more restrictive than the rules in
food stamps, Medicaid, or the Temporary Assistance for Needy Families
program and should be made less harsh.

* Social Security Administration,
Income of the Population 55 or Older, 2002, March 2005, Table 1.3.

** National Council of La Raza, The
Social Security Program and Reform: A Latino Perspective, 2005, p.
12.

It should be kept in mind, however, that not all minimum benefit proposals are
alike. Some proposed minimum benefits, including the minimum benefit endorsed
by the Presidents commission on Social Security, would phase out over time.
Such proposals would establish a minimum benefit floor, but the floor would
rise more slowly than the Social Security benefits it is meant to augment.
Over time, the minimum benefit would become largely meaningless. Other
proposals would allow the minimum benefit to grow along with Social Security
benefits as traditionally calculated. This would produce a minimum benefit
that would not phase out over time and be of far greater value in retirement
to low-wage workers who are young today.

These
NCLR proposals deserve consideration as part of Social Security reform. It
should be noted that resolving these issues does not require making
fundamental changes to Social Security. They can be addressed through
relatively modest adjustments within the current system. Private accounts
would do little to solve these problems and would end up harming Hispanics by
undermining the features of Social Security that benefit the Hispanic
population substantially.

Conclusion

The current Social
Security system provides the Hispanic community with valuable benefits.
Hispanics receive better returns on the taxes they contribute to the Social
Security system than other workers, and elderly Hispanics rely on Social
Security benefits for a greater share of their income than the rest of the
population.

Closing the Social Security
shortfall is particularly important to the Hispanic community. As a young
population that is rapidly aging and that receives more in return for its
contributions to Social Security than others, Hispanics have much invested in
the future solvency of the system.

However,
as this analysis indicates, the Hispanic community should be wary of changes
that seriously threaten the benefits that Hispanics receive from the current
system, under the guise of restoring solvency. Plans such as the Presidents
that rely solely on benefit reductions to close Social Securitys shortfall,
and that would place the greatest burden on younger workers, would be more
detrimental to the Hispanic community than alternative reforms. Hispanics
also would be harmed by private-account plans that shrink the social insurance
aspects of Social Security by linking each persons benefits more directly to
that persons tax contributions without regard to whether the worker has
earned low wages or encountered some major misfortune.

Hispanics
retirement security needs to be strengthened. But substantially scaling back
Social Security would have the opposite effect, as it is the one form of
retirement security that now works well for the Hispanic community.
Hispanics should instead be given incentives to increase the amounts they save
for retirement and thereby to bolster their retirement security. This can be
done by reforming the current system of retirement tax incentives to provide
greater incentives and opportunities for low- and middle-income Americans
workers and their families to build assets for retirement.

End Notes:

[1]
Fernando Torres-Gil is Director of the UCLA Center for Policy Research on
Aging and Acting Dean of the UCLA School of Public Affairs. Robert
Greenstein is Executive Director, and David Kamin is a Research Assistant,
at the Center on Budget and Policy Priorities.

[2]
See Fernando Torres-Gil, Robert Greenstein, and David Kamin, The
Importance of Social Security to the Hispanic Community, Center on Budget
and Policy Priorities, June 28, 2005.

[4]
Although the Presidents Social Security proposals have been widely
reported as protecting benefits for all of those the bottom 30 percent of
income earners, this is clearly not the case. A substantial number
of low-income beneficiaries would be subject to benefit reductions. Those
affected include elderly widows and divorced spouses, as well as
low-income children of deceased workers. Such beneficiaries would be
subject to Social Security benefit cuts, regardless of their income level,
if they receive a Social Security spousal or survivors benefit that is
based on the earnings of another person (usually a deceased parent or a
spouse or ex-spouse) who was not in the bottom 30 percent of wage
earners. Many spouses and children whose families were not poor while the
familys breadwinner was alive fall into poverty or low-income status
after the death of the breadwinner; such people would face benefit
reductions under the Presidents plan. For more details, see Jason
Furman, New White House Document Shows That Many Low-Income Beneficiaries
Would Face Benefit Cuts, Center on Budget and Policy Priorities, May 10,
2005, available at
/archiveSite/5-10-05socsec2.htm.

[5]
Including the cost of the private accounts that the President has
proposed, the Presidents proposals close an even smaller share of the
75-year gap. Taken together, the Presidents proposals would close only
about 30 percent of the 75-year shortfall.

[6] This
assumes an estate tax along the lines of the tax that is slated to be in
effect in 2009, when the exemption from the tax will be $3.5 million per
individual ($7 million per couple) and the top estate tax rate will be 45
percent.

[10]
According to official government projections, Hispanics have substantially
longer life expectancy than the rest of the population. Based on Census
Bureau data, the Social Security Administration reports that Hispanic men
turning age 65 in 2004 can expect to live an additional 20 years, compared
to 16 years for all men, and Hispanic women aged 65 in 2004 can expect to
live an average of 23 years, compared to 20 years for all women. The
Government Accountability Office has come to similar conclusions, also
using Census Bureau data, as have the Social Security actuaries. Several
researchers have raised questions as to whether Hispanics
longer-than-average life expectancies are real or are a product of
measurement error. Even if Hispanics did not have longer-than-average
life expectancies, they would receive well-above-average rates of return
on their contributions to the Social Security system because they exhibit
all of the other characteristics described here.

[11] The
Hispanic population also has certain characteristics that would tend to
lower Hispanics rate of return on their contributions to Social
Security. In particular, a slightly smaller share of the elderly Hispanic
population aged 65 or older is or has been married than is true of the
rest of the elderly population. Thus, the Hispanic population may not
benefit quite as much as the rest of the population from spousal
benefits. According to official government measures, Hispanics of working
age also have lower mortality rates than others of the same age, which
would tend to reduce the
benefits Hispanics receive from Social Security survivors benefits. The
effects of these two characteristics, however, are substantially
outweighed by the impact of the characteristics described in this analysis
that significantly increase the rate of return that Hispanics receive on
their Social Security contributions. On net, Hispanics receive a
substantially higher rate of return on Social Security than the rest of
the population.

[13] For
detailed analysis of the problems with comparing the rate of return on
private accounts to the rate of return on Social Security, see Jason
Furman, Would Private Accounts Produce a Higher Rate of Return Than
Social Security? Center on Budget and Policy Priorities, June 2, 2005,
available at
/archiveSite/6-2-05socsec.pdf.

[21]
NCLR, The Social Security Program and Reform: A Latino Perspective.

[22]
This is not the case for citizens from the 20 countries with which the
United States has totalization agreements in effect. Under these
agreements, the United States coordinates Social Security benefits with
the public pension systems that exist in those countries. Work in both
countries can be counted toward the ten-year eligibility requirement for
Social Security benefits, although to be eligible for totalization a
worker must be employed in the United States for, at least, a year and a
half. Initial Social Security benefits are then pro-rated, reflecting
the number years of employment in the United States. Currently, Chile is the only Latin American country with which the
United States has a totalization agreement that is in effect. The United
States has signed such an agreement with Mexico, but the President has yet
to submit it for Congressional review.